The demise of the cross-subsidy concept in U.S. domestic air transportation

Reasons and implications

George C. Eads

Expert InsightsPublished 1977

Examines reasons for and implications of the Civil Aeronautics Board's phase 9 opinion in the domestic passenger fare investigation. This opinion, issued in 1974, reversed the Board's longstanding policy of attempting to use "excess" profits from lucrative routes to support losses on less lucrative routes. The author contends that this reversal was caused by the Board's realization that cross subsidy is unworkable in the context of the current regulatory and competitive structure of the U.S. domestic airline industry. The paper traces the development of this realization and speculates about the role that economists played in bringing it about. It also explores the question of whether the airline experience is relevant in other regulatory situations where distributional issues are of central concern. The conclusions on this point are pessimistic.

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Eads, George C., The demise of the cross-subsidy concept in U.S. domestic air transportation: Reasons and implications. Santa Monica, CA: RAND Corporation, 1977. https://www.rand.org/pubs/papers/P6063.html.
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